Reverse Mortgages

You’ve clicked on this title expecting perhaps not the most riveting read compared to other posts. However, while the reverse mortgage is a valued loan product that is used with great frequency, its beginnings are as heart-warming as it gets. The scene was 1961, Portland, Maine, and a woman named Nellie Young had suffered the loss of her husband, a local high school football coach. Nelson Haynes of Deering Savings & Loan examined the case and determined that they could help Nellie remain in her home (despite the loss of her husband’s income source) via what was unknown at the time – a reverse mortgage.

A reverse mortgage is a type of loan where someone (typically a senior, age 62 and older) can borrow against the value of the home and receive the corresponding funds as a lump sum, a line of credit or fixed monthly payments. Unlike the mortgage we all know, where one pays the loan back monthly over time, there are no payments with a reverse mortgage. Rather, the loan balance of the reverse mortgage is due back to the lender when the borrower dies, changes homes, or sells the home. Strict, federal regulations require the loan amount not to exceed the home’s value and that the borrower’s estate is also not held responsible for any payments should the difference be greater than the home’s value. The latter typically occurs if the borrower lives a very long time or there is a precipitous drop in the home’s market value.

Reverse mortgages grew moderately through the 60s and 70s and hit their peak during the financial crisis of 2009. Ever since they have been on the decline and a lot of changes have been levied as a result. But let’s return to basics for a second. Reverse mortgages are great for seniors who need some cash in a hurry. For many elderly folks, most of their wealth is tied up in their home. If something should occur, likely medically related, having enough financial liquidity can be challenging. While this is good, these types of loans are usually very complex and costly.

The home itself is the collateral for the reverse mortgage. There have been cases when someone passes away who has taken out a reverse mortgage where the heirs choose instead to pay off the mortgage so they can keep the home in the family. Reverse mortgage proceeds are not susceptible to taxes and the IRS thankfully considers it as if it was a loan advance. The most common reverse mortgage is the home equity conversion mortgage (HECM).  The pros are what we’ve mentioned, while the most common con is taking out a HECM means you will be spending a large part of your home’s equity. You also are hampered from passing your house down to heirs (unless they choose to pay off the mortgage once you pass).

While reverse mortgages are marketed aggressively to seniors as a financial product to be taken advantage of, they do not provide a long-term solution to a financial problem. They provide short-term liquidity which might get the person out of a bind, but it might not be worth the loss compared to borrowing money from another source for example. This is a great example of a product designed to help someone, but it is a sure-fire band aid and not a cure or remedy for long-term financial health.